This week's controversial budget from the McGuinty Liberals will help keep Ontario's economic growth below the national average, according to the latest provincial outlook from Royal Bank of Canada.

The bank is forecasting that Canada's economy will grow by 2.7 per cent this year, a solid improvement from a horrible 2003, but still below the benchmark of three per cent desired by the Bank of Canada.

RBC said it expects all provinces east of Manitoba to fall short of the national average, Ontario among them.

Thanks to the first budget of Ontario Premier Dalton McGuinty delivered Tuesday, the province's economy will endure an added burden as it struggles with the impact of a strong domestic currency on its huge automotive sector.

The Ontario Liberals have introduced a new healthcare "premium" meant to help fund billions in new spending on the healthcare system. Commencing in June, every Ontarian who earns more than $20,000 a year will start paying a premium of $300 to $900 a year based on their income. The premium will be spread across the year and added to existing provincial income tax deductions.

Over the next year, the premium is expected to raise $1.6 billion for government coffers, and subsequently reduce the disposable income of taxpayers by the same amount.

The healthcare premium, as well as higher tobacco and alcohol taxes, will cut economic growth in Ontario by half of a percentage point this year, RBC said.

Ontario's economy is now expected to grow by 2.5 per cent in 2004 and 3.4 per cent in 2005.

However, RBC did credit the Ontario Liberals for "resisting the pressure to rush towards a balanced budget."

MANITOBA TO LEAD

RBC believes the economic growth leader this year will be Manitoba.

Manitoba's economy is forecast to grow by 4.1 per cent this year, a huge jump from 1.4 per cent in 2003.

"Three main factors working in the province's favour are improved crop conditions, net migration and fewer constraints on demand for hydroelectricity," RBC assistant chief economist Derek Holt said in the report.

Increased levels of precipitation in the spring and winter are expected to yield better crops of barley, spring wheat, durum wheat and canola, as well as boost export sales of hydroelectric power, which fell by 12 per cent last year due to low water levels.

"The boost in water supply due to the above-average precipitation should ease the constraints in demand for hydroelectricity," Holt added.

Alberta and British Columbia will also enjoy respectable rates of growth at 3.3 per cent and three per cent respectively.

Saskatchewan, however, is expected to suffer growth of only 2.5 per cent, down from 4.5 per cent in 2003.

"A renewed threat of drought-like conditions, fiscal restraints and ongoing net outward migration are all partially cancelling out gains from potash production and the energy sector," Holt said.

Weaker manufacturing activity and exports is also expected to limit economic growth in Quebec to 2.5 per cent this year.

In the Maritimes, growth in Nova Scotia will grow to 2.3 per cent this year from a weak 0.9 per cent last year.

Throughout the rest of Atlantic Canada, Prince Edward Island is expected to see economic growth of 2.4 per cent this year. Newfoundland and Labrador's economy will slow to 2.5 per cent from last year's 6.5 per cent.

In New Brunswick, growth will slip to 2.4 per cent from 2.6 per cent.

"New Brunswick's exports have declined substantially as a result of the rapid appreciation of the Canadian dollar," RBC said.

"Exports fell in 2003 for the first time since 1991 and declined on a year-over-year basis for the past six months."